Friday, December 19, 2014

Market Week Wrap-up

The risk-off tone seen in markets last week lingered early this week with crude
prices still sinking and the Russia's situation worsening. But by midweek
authorities in Moscow took dramatic action to gird the ruble while oil prices,
and probably more importantly the oil related stocks were helpfully
stabilizing. Heading into Wednesday's FOMC meeting investor risk appetite
appeared to be building; which was evident in narrowing junk bond spreads and
the stabilization of several emerging market currencies, most notably the
ruble. That afternoon the FOMC gave an upbeat assessment of the economy and
replaced the "considerable time" component of its statement with a
pledge to be "patient in beginning to normalize monetary policy."
This cemented expectations that Fed remains on course for a mid-2015 rate lift
off. Thursday saw the S&P 500 have its best day in more than a year and the
Dow surged 400 points. US Treasury yields lifted post-FOMC and the curve
steepened as the long end underperformed. There was some slightly better
preliminary German and Euro Zone manufacturing PMI data, and the German
December ZEW survey was much better than expected, providing a slight glimmer
of hope for Europe as well. Stocks put in yet another V-shaped bottom, and for
the week the DJIA rose 3%, the Nasdaq added 2.4%, and the S&P500 gained
3.4%, leaving the broad index back near all-time highs.

Oil seemed to find a short-term floor this week, as WTI pivoted around $56 for
most of the week after marking a fresh multi-year low below $54 on Tuesday.
Brent crude notably dropped below $60 but was back above the key psychological
level by week's end. Nevertheless, crude is still on track to record its fourth
consecutive weekly decline, and OPEC continues to signal it is comfortable with
letting the rout run awhile longer. In public statements, Gulf OPEC members
said they can wait for a long time for prices to stabilize. The Saudi Oil
Minister said it would be difficult if not impossible for OPEC and Saudi Arabia
to cut production, though he felt certain that the current oil market issues
are "temporary" and caused in part by market speculators.

Russia entered full-blown crisis mode this week as continued oil declines kept
hammering the ruble. Last week's 100 bps rate hike did little to stem the slide
in the ruble, and on Monday USD/RUB rose another 10%, to above 66. This
prompted another surprise Russia Central Bank move, this time a massive 650 bps
hike of its key rate to 17%. This momentarily knocked USD/RUB back down to 58,
but then the pair rapidly jumped on Tuesday to as high as 78, prompting a real
sense of panic. The Russian Finance Ministry intervened with some FX purchases,
but more importantly threatened fresh "measures" to stabilize the
ruble while also ruling out capital controls. Further interventions and news
that the government and the central bank had agreed to vaguely outlined
"measures" seem to have stabilized the currency around 60 to the
dollar.

Note that in the search for reasons behind the chaos in Russia, more analysts are
pointing to oil giant Rosneft's sale of 625 billion rubles in new bonds last
Friday - a deal worth $10.9 billion at the time - to help repay a $7 billion
loan by December 21st. State banks bought the bonds, which were then deposited
at the Russia Central Bank, and analysts suggest this big infusion of
freshly-minted rubles was the proximate cause of the panic, aided and abetted
by the continuing slide in oil.

Switzerland surprised markets on Thursday with an unscheduled policy
adjustment, nudged in part by massive safe-haven flows from the Russian crisis
as well as Europe's continuing troubles. The Swiss central bank moved to
negative interest rates, widening its three-month Libor band to -0.75% to
+0.25% from 0.00-0.25% prior. The move to charge banks for overnight deposits
should help to crimp a recent rise in the safe-haven Swiss franc, which has
appreciated markedly in recent weeks amid Russia's currency crisis and the
ECB's moves toward deflation and sovereign QE. Note that the effective date of
the rate cut, January 22nd, is also the date of the next ECB policy meeting.

FedEx lost as much as 5% after missing top- and bottom-line expectations by a
hair in its second quarter earnings on Wednesday morning. Oracle gained 10% on
Thursday thanks to excellent guidance for third quarter and showing more
evidence that its cloud strategy is working. Red Hat earnings also benefited
from the industry migration toward the cloud, sending its shares up 10% on
Friday.

The US Financial Stability Oversight Council voted 9-1 on Thursday to designate
MetLife as a 'systemically important' financial institution (SIFI) on Thursday.
In naming the insurance giant a potential danger to the financial system,
regulators aired concerns that in a crisis, the company could be forced to dump
a large amount of bonds at fire-sale prices. The council also served notice on
the asset management industry, from BlackRock and Fidelity to large mutual
funds or managers inside large insurance firms, warning that their potential
risks to financial stability are now under close scrutiny.

Shanghai Composite trading remained a one-way street with the 4th consecutive
week of solid gains, taking the mainland index to a 4-year high above 3,100.
China HSBC flash manufacturing PMI for December fell into contraction for the
first time in 7 months at 49.5, below the 49.8 consensus, although the bulk of
the decline was due to a faster rate of decrease in input and output prices.
The housing market correction eased off, as November new home prices fell 0.6%
against October's drop of 0.8%. Money market rates also hit 10-month highs on
short-term demand for cash ahead of upcoming IPO offerings, while offshore Yuan
moved to 5-month lows on broad-based dollar strength.

In Japan, the ruling LDP party got the mandate it sought to proceed with
Abenomics with an overwhelming victory in the Lower House elections on Sunday,
comfortably retaining a 2/3rd supermajority. PM Abe cheered the support,
pledging to continue his reforms with the focus on boosting wages in 2015.
Moody's, which recently cut Japan's rating, acknowledged the election results
were important for Japan's credit standing. In a surprise move on Friday, the
BoJ raised its assessment on industrial production, exports, and housing
investment, while subsequent commentary from Governor Kuroda maintained that
CPI is still on track to hit the 2% inflation target. Yen weakness associated
with the post-FOMC rise in US yields was also instrumental in helping the
Nikkei225 to pull out of a nose-dive and it registered a 1.4% gain for the
week, as USD/JPY reclaimed some ground lost in the outside bearish reversal of
last week.